Car prices projected to jump under Trump trade agreement with Mexico

President Donald Trump says he'll be "terminating" the North American Free Trade Agreement as he pursues a deal with Mexico and starts negotiations with Canada. (Aug. 27)
AP

President Donald Trump talks on the phone with Mexican President Enrique Pena Nieto, in the Oval Office of the White House, Monday, Aug. 27, 2018, in Washington. Trump is announcing a trade "understanding" with Mexico that could lead to an overhaul of the North American Free Trade Agreement. Trump made the announcement Monday in the Oval Office, with Mexican President Enrique Pena Nieto joining by speakerphone. (AP Photo/Evan Vucci)(Photo: Evan Vucci, AP)

Although it may be too early to predict the full impact of President Donald Trump’s tentative trade agreement with Mexico, there’s one thing you can count on: New car prices will probably rise.

“The new agreement will push production costs higher on Mexican products — parts and vehicles — which, eventually, will be paid by American consumers," said Michelle Krebs, executive analyst at Autotrader, the car-shopping website owned by Cox Automotive.

Trump said he had made a limited bilateral trade agreement with Mexico that excludes Canada. He said the North American Free Trade Agreement will be called the U.S.-Mexico trade agreement.

“Vehicle costs are going up for other reasons as well — higher transaction prices because of the richer mix of utility vehicles, metal tariffs, more technology content,” Krebs said. “A new NAFTA agreement will only add to the price headwind consumers are already facing.

“More people will be pushed out of the new car market and will turn to the used car market. Already, in anticipation of tariffs, used car prices, which typically decline in summer, have been rising — for 10 straight weeks now,” she said.

The move would raise overall costs by requiring 75 percent of the value of parts in a car to be made in North America and 40 percent of the total car to be built in plants where the workers make at least $16 per hour.

United States Trade Representative Robert Lighthizer, front left, and Mexican Secretary of Economy Idelfonso Guajardo, front right, walk to the White House on Monday August 27, 2018.(Photo: Luis Alonso Lugo, AP)

She continued, “Just because a tentative trade pact has been reached with Mexico, we don’t expect automakers and suppliers to abruptly announce changes in their production plans. The auto industry is a complicated, long-lead business with many factors to consider and more trade agreements to negotiate, including ones with Canada and, most importantly, China.”

Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, said, “None of the stuff that has come out works unless Canada is a part of it. Canada is pretty important.”

Douglas George, the Detroit-based consul general of Canada responsible for Michigan, Ohio, Indiana and Kentucky, sounded positive Monday about the chances of Canada joining the trade deal, which Mexican President Enrique Peña Nieto urged.

“We’re encouraged by the optimism shown by our negotiating partners,” George told the Free Press. “Progress between Mexico and the U.S. is a necessary requirement for any renewed NAFTA agreement. While they’ve been negotiating, we’ve been in regular contact with them over the last weeks. We’ll continue to work toward a modernized NAFTA. We have a three-way negotiation that’s been ongoing.”

Mexico's smart deals

Analysts noted that Mexico has been aggressive about looking beyond the U.S. for beneficial trade deals.

“There has been investment from Korean, Japanese, Chinese and German automakers,” said Dave Sullivan, manager of product analysis at AutoPacific Inc. “This has resulted into a mushrooming supplier base in Mexico. For automakers, the prospect of business as usual with Mexico allows for further investment in product and assembly decisions that can also impact production decisions in the U.S. The fact is, assembly work in the U.S. is still quite dependent on low-cost countries producing the parts to allow for higher cost final assembly in the U.S.”

He added, “Mexico has put together a series of trade agreements with other countries that makes it an attractive place to do business. Mexico has been fighting back against China to become more competitive. Mexico has been a much larger threat [to U.S. labor] than Canada. Canada appears to be sitting on the back burner for a bit.”

Analysts said Canada will probably benefit from this new deal because the USA and Canada are high-wage countries; what helps America helps Canada.

“If Canada is not included, it’s not really a North American Free Trade Agreement anyway. But the negative image of the acronym NAFTA as a name is a delusion in President Trump’s mind,” said Robert Kolt, a public relations and communication professor at Michigan State University. “NAFTA is thought of as positive term in the public’s perception. Trump just doesn’t even want to be reminded of the name Clinton.”

NAFTA was crafted under President Bill Clinton. During the 2016 presidential race, Donald Trump and Hillary Clinton talked of the need to update the trade deal to benefit American workers.

If Clinton had been elected, she would have probably agreed to the same deal, said Krzysztof Pelc, a political science professor at McGill University in Montreal and an expert on international trade politics.

“The hardest thing to negotiate in the agreement with Mexico was the auto industry part — that was the most contentious thing in NAFTA,” he said. “Canada just needs to decide whether it’s on board or not. Details remain confidential because it’s an ongoing negotiation.”

Deciding how much of a car must be manufactured in the USA, Mexico and Canada has always been tricky, and the move carries risks.

“The irony is Canada kind of gets a free ride, though that’s something Canada would never admit to. But there’s risk here,” Pelc said. “What if the jobs don’t go to the U.S., but they go to Asia? What if car manufacturers just start importing more parts from Asia and pay the tariff? Car producers may shrug and say the whole thing is too much of an administrative headache.”

A president who prides himself on reducing bureaucracy has, in some ways, increased bureaucracy for companies that may just decide to go elsewhere.

“Car manufacturers could just shrug and say forget all about the NAFTA deal. We’ll get cheap car parts from Malaysia, South Korea and China. Then the U.S. will lose even more jobs.”

Labor reaction

Dennis Williams, former president of the Detroit-based UAW, earlier this year applauded Trump's efforts to revisit the trade deal.

On Monday, Labor leaders from five big unions issued a joint statement:

"NAFTA has had a devastating impact on workers for more than 25 years. We are aggressively engaged in pursuing an agreement that works for working people in all three countries, and we are not done yet. There is more work that needs to be done to deliver the needed, real solutions to NAFTA’s deeply ingrained flaws.

"Any new deal must raise wages, ensure workers’ rights and freedoms, reduce outsourcing and put the interests of working families first in all three countries. And working people must be able to review the full and final text and have the confidence not only in the terms of the deal, but its implementation, monitoring and enforcement. We remain committed to working with the administration to get NAFTA right. Our members’ jobs depend on it. But, as always, the devil is in the details."

Leaders of the UAW, AFL-CIO, United Steelworkers, Communications Workers of America and the International Association of Machinists and Aerospace Workers released the statement.

For now, analysts are taking a wait-and-see approach as Trump rebrands the trade deal.

“Mexico and Canada would be on board with changing the name because it could help get things ratified by Congress,” Pelc said. “No doubt, the nature of the changes in the new agreement are not in keeping with someone who has denounced NAFTA as the worst trade deal since forever. This is a rebrand.”

Meanwhile, U.S. Rep. Sander Levin, a Royal Oak Democrat, said "major questions" remain and no one should celebrate anytime soon.

“Meeting just now with a group of workers in Mexico who were fired from their jobs in a tire factory after they went on strike to protest wages of less than $2 an hour made it crystal clear how far Mexico still has to go to ensure real labor rights," he said in a statement. "These workers are trapped in contracts that they never voted on or had any involvement in — signed before there were even any workers on the job. Now they are facing unemployment, blacklisting, harassment and threats for attempting to demand their rights. If a rewrite of NAFTA fails to forcefully and directly address this issue, the result will just be more downward pressure on American workers’ wages and outsourcing of U.S. jobs to very low-wage Mexico."

No one has offered evidence that change is significant, Levin said.

"Unfortunately, members of Congress have not seen the reported agreement, despite statutory requirements for full consultation. But reports to date leave major questions about the specific rights of workers to overturn the thousands of unfair ‘protection’ contracts now in place in Mexico, as well as the mechanisms to effectively enforce these rights," he said. “I strongly urge the administration to stay at the bargaining table as long as it takes to ensure a good deal for America’s workers, and to consult with Congress as required by law.”

Levin is in Mexico this week to discuss labor rights with workers, businesses, researchers and government officials.